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Copper Peaking as Inventories Signal Slowing Demand. By Millie Munshi

July 29 (Bloomberg) -- Copper’s 76 percent rally this year may soon end on signs that China has stockpiled more than it can use in new homes, cars and appliances.

Inventories monitored by the London Metal Exchange posted their first back-to-back weekly gains since February, increasing 8.3 percent from an eight-month low. Sumitomo Metal Mining Co., Japan’s second-largest smelter, said Chinese imports are slowing after record purchases boosted domestic supplies, and U.S. copper-scrap exporters report shipments to Asia are dropping.

Prices will also decline because the 4 trillion yuan ($585 billion) of economic stimulus spending by China, the world’s biggest metals user, won’t make up for weak demand elsewhere, said Michael Pento, the chief economist at Huntington Beach, California-based Delta Global Advisors, which manages $1.5 billion. The global economy will contract 1.4 percent this year, deeper than forecast in April, and a sustained recovery from the worst recession since World War II may be a year away, the International Monetary Fund said July 8.

“I’m looking for a pullback right now in copper,” said Pento, who correctly forecast in January the price would rise at least 77 percent this year. “Base metals have just gotten overextended as people bet on the China story. Investors should exit this market now as the price comes down to match reality.”

The metal for delivery in three months jumped to $5,646 a metric ton ($2.563 a pound) on July 27 on the LME, the highest price since Oct. 8, and closed at $5,415 a ton today. Copper has rallied more in 2009 than it has in any year since 1987.

On the New York Mercantile Exchange’s Comex division, copper futures climbed to a nine-month high of $2.579 a pound on July 27, topping Pento’s January forecast of $2.50 by year-end.

‘Likely to Fall’

Refined copper imports by the Chinese more than doubled to 1.78 million metric tons in the first half and reached a monthly record of 378,943 tons in June, customs data show.

“China’s copper imports are likely to fall in the second half of this year because it bought so much in the first half, the government has stopped buying and demand from end-users may not be as big as people anticipated,” said Zhao Mingwang, manager of futures trading at Zhuji, China-based Zhejiang Honglei Copper Co., which produces about 100,000 tons of wire and rods a year. “The imports were so large it’s hard to fathom where it all went.”

Most of the gains in LME-monitored inventories during the past month reflect the eightfold jump in the volume of material in warehouses in Singapore and South Korea, the closest to China.

Scrap Imports

As those LME stockpiles increased, China’s scrap-copper imports tumbled 18 percent in May and 15 percent in June after rising for three months, government data show.

Inventories monitored by the Shanghai Futures Exchange more than doubled this year, sparking concern the pace of consumption in China hasn’t kept up with imports. Some of those purchases were by the State Reserve Bureau, which contracted to buy between 300,000 tons and 400,000 tons of the refined metal this year, according to Sydney-based Macquarie Group Ltd. The amount is equivalent to as much as 22 percent of first-half imports.

China may not continue buying industrial metals for strategic reserves after prices rebounded, the Beijing-based Caijing business magazine reported June 29, citing Yu Dongming, an official at the National Development and Reform Commission, the top economic planner.

Copper Surplus

“Excessive imports mean much of the purchased metal was just stored, raising the risk that they may sell it back to the market and depress prices,” said Koichi Kaku, the general manager of the copper and precious metals sales department at Tokyo-based Sumitomo Metal Mining.

Imports may have exceeded manufacturing demand by as much as 1.3 million tons in the first half, Kaku said on July 24. “I don’t think copper prices climbed because of a dramatic improvement in supply-demand conditions,” he said. “I’m skeptical about a strong recovery in the market.”

Purchases may falter this quarter as government stockpiling slows and after record volumes boosted inventories before the seasonally slow summer, UBS AG said. Imports may drop to 100,000 tons a month in July through December, from an average of 280,000 tons in the first five months, analysts for the Zurich- based bank said in a July 6 report.

“The rally in prices is not entirely fundamentally driven,” said Wang Xiang, import and export manager at Daye Nonferrous Metals Co. in Huangshi, China. “If I imported copper before May, my inventories now have a profit on paper and I’d be in no hurry to sell. There is a lot of speculation going on.”

China-Driven

The price “is really driven by China, and there is obviously risk in the Chinese situation depending on their buying patterns,” Richard Adkerson, the chief executive officer of Phoenix-based Freeport-McMoRan Copper & Gold Inc., said July 21 on a conference call with investors.

Freeport, the world’s largest publicly traded producer of the metal, reported that second-quarter earnings tumbled 38 percent from a year earlier to $588 million as the global recession slashed demand for metals.

Every 10-cent change in the price of a pound of copper in New York alters the company’s cash flow by $260 million, Adkerson said. The commodity rally has helped send Freeport shares up 140 percent this year on the New York Stock Exchange.

China’s economy grew 6.1 percent in the first quarter, the least since 1999, Statistics Bureau data show. Growth accelerated to 7.9 percent in the second quarter, still the third-slowest rate since 2003. The recovery is “not yet firm,” Li Xiaochao, a bureau spokesman, said July 16.

‘Building Up Inventories’

Copper soared 28 percent in the first half of last year to reach a record July 2 as the U.S. was in the midst of the worst recession in at least five decades and demand dropped. The metal fell more than 60 percent in the second half as usage tumbled.

This month, the commodity gained even as inventories rose, a sign that prices are inflated, Delta Global’s Pento said.

“People have been optimistic, but it is not in line with actual demand,” said Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York. “It seems like the Chinese buying has been about building up inventories and not actually consuming the metal.”

The rally is “mainly driven by ample liquidity,” said Honglei’s Zhao. “The arbitrage window has closed because the domestic price is no longer higher than the overseas price. That too will lead to lower imports.”

‘Very Spotty’ Imports

Some analysts and producers remain bullish. Goldman Sachs Group Inc., based in New York, advised buying metals in a note distributed on July 16, saying copper will benefit from demand from emerging markets.

Investor optimism may continue to support prices, said Warren Gelman, president of Kataman Metals in St. Louis, a brokerage which sells 24 million pounds of scrap and primary nonferrous metals a month.

“The demand has been very spotty, and from a business point of view, the copper price shouldn’t be this high,” Gelman said. “But investors have a lot of interest in buying copper, and that’s what’s been keeping the price high.”

Chinese lenders responded to the economic slowdown by tripling loans in the first half of 2009 from a year earlier to 7.37 trillion yuan, according to the nation’s central bank.

The increased lending spurred demand for properties, helping home prices in 70 major Chinese cities rise for the first time in seven months in June. Passenger-vehicle sales climbed 26 percent to 4.53 million in the first half, while commercial-vehicle sales fell 0.5 percent to 1.57 million, the China Association of Automobile manufacturers said July 9.

Dollar Slide

Investment in fixed assets, including water and road projects, jumped 34 percent to 9.13 trillion yuan, the National Bureau of Statistics said. Spending on capital projects accounted for 87 percent of China’s economic growth in the period, according to Morgan Stanley Asia Ltd. Chairman Stephen Roach, who is based in Hong Kong.

Lower interest rates coupled with U.S. stimulus programs will spur a drop in the dollar and also buoy commodities, Pento of Delta Global said. The greenback has fallen 3 percent this year against a basket of six major currencies.

“I see copper dropping for a few months, before picking back up again,” Pento said by telephone from Holmdel, New Jersey. Prices may fall about 9 percent to below $2.30 a pound by September before rebounding, he said.

Chile’s View

In Chile, the world’s biggest producer of the commodity, officials expect sustained demand from China, which buys more than one-third of the metal produced in the South American country. Shipments to the Asian country in June jumped to 172,756 tons, up 25 percent from May and almost double the amount in February, government data show.

Cochilco, the government copper commission in Santiago, today raised its price estimate to $1.95 a pound from a May 18 forecast of $1.75.

The South American exporter is more optimistic because “big investment plans” by Asian countries depleted stockpiles in LME warehouses, Santiago Gonzalez, Chile’s mining minister, said July 13. Prices will average $2 a pound if Asian countries “maintain current levels of activity,” he said.

“Stockpiling by the State Reserve Bureau led to record levels of refined copper imports in the first half, and economic recovery will keep imports at similarly high levels for the rest of the year,” said Ma Xiaoxin, deputy general manager of Beijing-based China Minmetals Nonferrous Metals Co.’s copper department. Prices should mostly stay above $5,000 a ton ($2.27 a pound) until December, Ma said.

Housing Collapse

Any declines in Chinese buying will have a “significant” impact because U.S. demand has suffered from slowdowns in construction and manufacturing, said Gold Arrow’s Groenewegen.

Automakers slashed output by 50 percent in 2009’s first half, according to Ward’s Automotive Reports. U.S. sales of cars and light trucks failed to reach an annual rate of 10 million in any month this year, after averaging more than 16 million during this decade. At least 16 suppliers have filed for bankruptcy protection since the end of 2008.

Home construction has subtracted from U.S. gross domestic product every quarter since the start of 2006. Spending on U.S. construction projects dropped 0.9 percent in May, the Commerce Department said July 1. That was the fourth decline in five months, signaling a slow rebound from the housing recession.

U.S. metal recyclers also say they are exporting less scrap copper to China, which may signal the country is oversupplied.

Chinese imports slumped 40 percent in the first half from a year earlier to 1.74 million tons, customs data show. Guangdong province, which brings in 40 percent of the scrap, tightened cargo inspections to clamp down on underpayment of taxes, delaying shipments, Shanghai-based commodities researcher CBI China Co. said July 6.

‘Reluctant to Buy’

“There’s been a dramatic change as the Chinese have been reluctant to buy scrap copper,” said Bret Tauben, vice president for copper at St. Louis-based Metalsco, one of the largest U.S. recyclers. “The demand has been very soft.”

Scrap metal, used in about 25 percent of the world’s refined copper output, is selling at the widest discount to New York futures since July 2008. China’s buying may fall more as supplies are plentiful, said Mark Lewon, vice president of operations at recycler Utah Metal Works Inc. in Salt Lake City.

“The widening discount is somewhat predictive of what’s to come in the futures market,” Lewon said. “I keep expecting the prices to drop. When you look at the real demand that’s out there, you can see that the copper price has gotten overvalued.”

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